Booking Holdings

Booking is the largest OTA (Online Travel Agency) globally. It also owns Priceline, Kayak, Agoda.

Major Shareholders

Shareholding is widely dispersed with the highest with Vanguard at 8%. CEO Glen Fogel owns about 0.1% and his shares are worth $57 million.

Management

The company was founded in 1999 as Priceline.com. Priceline acquired Booking.com in 2005 and renamed the company to Booking Holdings in 2018. The current CEO Glen Fogel has been with the company since the last 20 years and was EVP Corporate Development till 2017. He was involved with the acquisition of Booking and others.

Strength

Dominant in Europe and APAC – where there are more independent hotels. Independent hotels depend on OTAs to a much greater extent that branded hotels and hence provide more commissions to OTAs. Large branded hotels get approx 13% of their reservations through OTAs as compared to more than 50% for independent hotels. That is why, the commissions of Booking as a percentage of gross bookings is higher. Booking – total revenue $15b (15.6% of gross bookings $96b) vs Expedia Group – total revenue $12b (11.2% of total bookings $108b).

Single dominant platform: Booking gets majority of its revenues from its namesake platform. Whereas, their competitor Expedia gets their revenue from multiple brands such as Expedia, Hotels.com, Orbitz, Travelocity, etc. As a result, their competitors are more dependent on Google since they need to drive traffic to these multiple brands. Booking being a more dominant single platform has lesser dependence on Google. Booking gets more than 50% transactions directly from their own website. 1

However, Booking is still one of the largest buyers of ads from Google. They spend $4.4b (29% of revenue in 2019) on performance marketing which goes mostly to Google. But their performance marketing spend is more efficient since they need to drive traffic to Booking vs multiple brands for their competition.

Barriers to entry: the industry has high barriers to entry. Any new entrant will have to build the large hotel inventory. Even if someone is able to do that, they will have to spend considerably in marketing to drive traffic to their website. For example, Booking spent $5 billion across performance and brand marketing and Expedia spent $6.1 billion in sales and marketing in 2019.

High returns on capital and asset light: Booking has extremely high returns on capital with RoE of 46% and 82% in 2018 and 2019 respectively. The business is a cash generating machine – they generated cash flow from operations of $14.9 billion over the last 3 years. Additionally they generated cash from investments of $7 billion over the same period. Out of this, they spent $1.9 billion on capex and acquisitions and $16 billion on share buybacks. They had cash and equivalents of $7.3 billion at the end of 2019 and total debt of $8.6 billion.

Weakness

Engagement frequency of customers is quite low as they book hotels a few times per year. This makes it difficult to build a connect with the customers. Hence customer loyalty and switching cost will continue to be very low.

Branded hotels are taking share away from independent hotels even in Europe and APAC. This will continue to be a headwind for Booking.

Increasing competition from Google is another headwind for them and more broadly for the entire OTA sector. Google has launched its own products such as Google Hotels to compete with Booking and other OTAs. OTAs are not happy with Google. This is what the Chairman of Expedia had to say about Google in their Q4 2019 earnings call –

“But when they compete against their advertisers, and we are one of their largest advertisers, we have Booking.com within their top five of advertisers. They’re using their tactics to squeeze these entities that are delivering real service is, among many things, antisocial. I mean, I think it’s bad practice. I think the government, which is getting engaged in this, whether it’s at the state level or the federal level, which I absolutely believe, in the next period, I don’t think I ask anybody to come and save us from our mistakes.

And by the way, we’ve made our own mistakes in our SEO practices which we are fast correcting. I told the senior management of Google exactly what we feel about this and have implored upon them to basically stop actually taking away the profits from businesses that are probably one of their main contributors to their advertising revenue. And I don’t know whether that will have much effect, but I’ve been very straightforward about it. And I think that there will be — look, when businesses get to this size, they absolutely have to have regulation, sensible regulation.

I’m not talking about breakups. I’m not talking about any crazy stuff, but I do believe that will happen. But we are making our own efforts. We’re driving direct relationships with consumers.”

Limited reinvestment opportunities: they have very limited capex requirements and reinvestment opportunities within the business. Thats why they have been returning most of the cash to shareholders in form of share buybacks. Also given their strength is the single dominant platform, it does not make sense to dilute that by acquiring more brands. Growth is a question mark and more so now with the Covid related shock.

Threat from Airbnb: this has become less important for the time being with Covid.

  1. https://www.wsj.com/articles/booking-directs-its-own-traffic-11550840400

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